The German federal cabinet has agreed to new rules governing how electricity from renewable sources will be compensated in the future. The new rules amount to a major reform of the Renewable Energy Law of 2000 (EEG in German).

That law established Germany’s aggressive feed-in tariff subsidy system, under which electricity transmission utilities were required to buy power offered by any wind or solar electricity generator, at a “tariff” or flat rate per kilowatt-hour, guaranteed over a 20-year contract.

The tariff was deliberately set high in the earlier years, in order to make renewable energy projects profitable at a time when wind turbines and solar panels were still very expensive. Regulators gradually reduced the feed-in tariff rate for new wind and solar capacity since then, as renewable technologies have become more cost-efficient.

Over the past 16 years, the EEG system supported a sustained boom in Germany’s wind and solar power production. Although renewable electricity amounted to just 6 percent of all electricity produced in 1999, this increased to 17 percent by 2010, and reached 33 percent in 2015 – as a direct result of the EEG.

From public investment in renewables, to free market approach

Germany’s EEG indirectly set off a world-wide renewables boom as well – because by creating a large, guaranteed market for renewable power, it motivated massive investments and continual improvements in efficiency of wind and solar power technologies. Several other countries followed Germany’s example, adopting EEG laws of their own.

Germany has long been a global role-model for the transition to renewable energy.

But now, the German government has decided to scrap the existing system of administered prices for wind and solar power. Instead, beginning in January 2017, it will operate competitive bidding systems in which the right to develop a particular wind or solar project will go to whichever credible bidder agrees to accept the lowest revenue per kWh on a 20-year contract.

The net effect: The cost to consumers of additional clean power should steadily decline.

In a speech introducing the reforms, Energy and Economy Minister Sigmar Gabriel, vice-chancellor and leader of Germany’s Social Democratic Party, described the move as a “paradigm shift” in energy policy.

Germany would be leaving behind a system of government-mandated prices, and moving toward a more free-market pricing system, he said.

Reform caps build-out of clean power

More controversially, the reform will limit the construction of new wind farms in northern Germany by setting a government-mandated upper limit on the amount of new capacity permitted each year.

The motivation for setting the limit, according to the government, is to make sure the build-out of northern Germany’s wind power generating capacity doesn’t exceed the pace of construction of new power transmission lines needed to move electricity from the north to industrialized regions in southern Germany, where power demand is highest.

“Last year, grid operators had to pay a billion euros for wind power capacity that went unused,” Gabriel said.

The government’s solution is to throttle back the construction of new wind generators in regions where there are transmission-grid bottlenecks, until grid expansion has had time to catch up. “That sets up an incentive to speed up the construction of grid capacity,” Gabriel argued.

Green Party energy expert Oliver Krischer disagrees vehemently. He urged the government to take a closer look at the reasons for bottlenecks in transmission grid capacity.

“Transmission grid problems could be defused if big coal- and gas-fired power generators reacted flexibly to temporary overcapacity,” which can occur on windy or sunny days, “or if [coal] disappeared from the market altogether,” Krischer said.

But the governing coalition sought to avoid a debate over this policy option – because, Krischer argued, it wanted to avoid any clash with vested interests, whose jobs and balance sheets were heavily invested in fossil-fueled power generation.

By the numbers

The government wants to keep renewables to less than 45 percent of Germany’s total electricity production until 2025. This is meant to stabilize the retail price of electricity by allowing utilities to continue to burn large quantities of cheap coal.

The annual cap on additional land-based wind power capacity will be set at 2,900 megawatts. That corresponds to between 600 and 900 new wind generators per year, depending on the size of the units.

For offshore wind parks, the rules remain as they were: From now until the year 2030, a cumulative total of 15,000 megawatts will enjoy a generous feed-in tariff rate. That’s about as much power as would be produced by 15 coal-fired power stations.

For the photovoltaic solar power sector, 600 megawatts of capacity will be assigned through the new project development bidding process annually, and for biogas, 150 megawatts annually.

Happy fossils, unhappy Greens

Critics say Germany’s transition to a clean-energy future will be strangled, not just throttled, by the caps. This will cause many renewable-energy sector jobs to be lost – along with Germany’s technological leadership in wind turbines and photovoltaic solar systems.

Hermann Albers, president of the German Wind Energy Association, said: “Instead of restrictions, regulations and caps, what’s needed is a stable dynamic of capacity expansion and a transfer of the responsibility for energy generation [away from coal and nuclear] to renewables.”

In contrast, the government’s electricity market reform was praised by industry associations representing heavy electricity users – and by the VKU, Germany’s association for municipal enterprises, which includes many electricity producers invested in fossil-fueled power plants.

“An affordable energy transition is only possible if competitive tenders are the rule,” said VKU CEO Katherina Reiche.

Climate targets in doubt

Germany’s climate policy goals – targets for rapid reductions in carbon dioxide emissions – will be put into serious jeopardy as a result of the government’s proposed reforms, according to Claudia Kemfert, senior energy economist at DIW, the German Institute for Economic Research in Berlin.

Vice Chancellor Gabriel disagreed, saying: “We will only achieve these [climate] targets if we make as strong progress in [decarbonizing] other fields, including heating and transportation, as we have made at building capacity in renewable electricity generation.”

The proposed EEG reform has been agreed by Germany’s federal cabinet, and will be discussed in the Bundestag, Germany’s parliament, in the coming weeks. It is expected to be decided before the summer recess starts on July 8.

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